Finance Minister Nirmala Sitharaman announced that the new Income Tax Act, 2025 will come into force from April 1, 2026, replacing the six-decade-old 1961 tax law. The new law aims to simplify compliance, reduce litigation, and make tax rules easier for ordinary taxpayers.
New Delhi: Union Finance Minister Nirmala Sitharaman on Sunday presented the Union Budget 2026 and announced major reforms in direct taxation, including the rollout of a completely new Income Tax law. She said the Income Tax Act, 2025 will come into force from April 1, bringing an end to the six-decade-old Income Tax Act of 1961.
While announcing changes related to overseas travel, the Finance Minister said,
“I propose to reduce TCS rate on the sale of overseas tour program package from the current 5% and 20% to 2% without any stipulation of amount,”
giving relief to individuals planning foreign travel.
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Providing relief to accident victims, Sitharaman announced a key exemption and said,
“I propose that any interest awarded by the motor accident claims tribunal to a natural person will be exempt from income tax and any TDS on this account will be done away with.”
Highlighting ease of compliance for small taxpayers, the Finance Minister announced automation in tax processes and said,
“We propose a rule-based automated process for small taxpayers in FY27 Budget.”
She further clarified filing timelines, stating,
“People filing ITR-1 and ITR-2 can continue to file till July 31. Non-audit business cases and trusts will be allowed to file returns till August 31,”
ensuring more flexibility for taxpayers.
Announcing another major reform, she said,
“now as a person you can file revised ITR by March 31 with a nominal fee”.
She also provided relief from harsh penalties by stating that minor offences will attract only fines. Importantly, she said there will be no penalty on non-disclosure of non-immovable foreign assets with an aggregate value of less than Rs 20 lakh and added,
“I propose to provide them immunity from prosecution,”
offering much-needed relief to small taxpayers.
The Finance Minister also confirmed that the new law will replace the existing tax framework entirely. Beginning April 1, the Income Tax Act, 2025 will come into force, replacing the six-decade-old tax law, and all tax changes proposed in the 2026–27 Budget will be incorporated into the new legislation.
Speaking in the Lok Sabha, Sitharaman said,
“This (direct tax code) was completed in record time and the Income Tax Act 2025 will come into effect from first April 2026. The simplified income tax rules and forms will be notified shortly, giving adequate time to taxpayers to acquaint themselves with its requirements.”
She further explained that the forms have been redesigned so that ordinary citizens can comply easily without facing difficulties.
The Finance Minister made it clear that the new Income Tax Act is revenue neutral. The 2025 tax law does not change existing tax rates but focuses on simplification, clarity, and reduction of disputes. The law reduces the volume of text and number of sections by nearly 50 percent compared to the Income Tax Act of 1961, helping reduce ambiguity and litigation.
One of the most significant structural changes is the introduction of a single “tax year” system. The new law removes the distinction between assessment year and previous year, simplifying the tax timeline. It also allows taxpayers to claim TDS refunds even if returns are filed after the deadline, without any penal charges.
The Budget also focused on boosting India’s digital and data infrastructure. Sitharaman announced a long-term incentive for global tech companies and said,
“I propose to provide tax holiday till 2047 to any foreign company that provides cloud services to customers globally by using data centre services from India,”
aiming to attract foreign investment and strengthen India’s data centre ecosystem.
To avail of this tax holiday, foreign companies will have to provide services to Indian customers through an Indian reseller entity, subject to prescribed conditions. The government also announced plans to strengthen the hospitality sector by setting up a National Institute of Hospitality through the upgradation of the existing National Council for Hotel Management and Catering Technology.
While presenting her direct tax proposals, the Finance Minister reiterated that the new Income Tax Act will come into effect on April 1 this year. She added that the simplified tax rules would be notified
“shortly”, “giving adequate time to taxpayers to acquaint themselves with its requirements,” and once again emphasised that “The forms have been redesigned such that ordinary citizens can comply without difficulty.”
In her ninth Budget presentation for the financial year 2025–26, Sitharaman recalled that she had earlier called for a comprehensive review of the Income Tax Act of 1961 to make it
“concise, lucid, easy to read and understand”.
The objective of the review was to address rising compliance costs for taxpayers and improve the efficiency of direct tax administration.
With the rollout of the Income Tax Act, 2025, the government aims to create a simpler, taxpayer-friendly, and litigation-free tax regime while maintaining revenue neutrality and encouraging ease of doing business in India.
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